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Strategy

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Set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors.

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Black Swan Events

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Highly impactful highly improbable. ex. 9/11 attacks, Enron. Show that 1. managerial actions can affect the economic well-being around the globe. And 2. Individuals can affect and be affected by firms actions.

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3 Elements of a Good Strategy

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1. Diagnosis of competitive challenge. Accomplished through strategy analysis of firms external and internal environments. 2. Guiding policy: addresses competitive challenge. Accomplished through strategy formulation, resulting in firm's corporate, business and functional strategies. 3. Set of coherent actions: implement firms guiding policy. Accomplished through strategy implementation.

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3 standard performance dimensions

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accounting profitability, shareholder value, and economic value

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How do we asses competitive advantage by measuring accounting profitability?

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use financial data and ratios derived from publicly available accounting data such as income statements and balance sheets.

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COGS/Revenue

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indicates how efficiently a company can produce a good.

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R;D/Revenue

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indicates how much of each dollar that the firm earns in sales is invested to conduct research and development. A higher percentage is generally an indicator of a stronger focus on innovation to improve current products and services, and to come up with new ones.

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SG;A/Revenue

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indicates how much of each dollar that the firm earns in sales is invested in sales, general, and administrative (SG;A) expenses. Generally, this ratio is an indicator of the firm's focus on marketing to promote its products and services.

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Limitations of accounting data

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- Is backward-looking. - Accounting data focus mainly on tangible assets, which are no longer the most important. ex. Hyundai's reputation for quality.

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Shareholders

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individuals or organizations that own one or more shares of stock in a public company—are the legal owners of public companies.

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Risk Capital

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From the shareholders' perspective, the measure of competitive advantage that matters most is the return on their risk capital, which is the money they provide in return for an equity share, money that they cannot recover if the firm goes bankrupt.

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Total return to shareholders

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The return on risk capital, including stock price appreciation plus dividends received over a specific period.

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Efficient market hypothesis

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The idea that all available information about a firm's past, current state, and expected future performance is embedded in the market price of the firm's stock

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Market capitalization (market cap)

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captures the total dollar market value of a company's outstanding shares at any given point in time (Marketcap=Number of outstanding shares×Share price). If a company has 50 million shares outstanding, and each share is traded at $200, the market capitalization is $10 billion (50,000,000×$200=$10,000,000,000, or $10 billion).16

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Limitation of measuring firm performance through total return to shareholders and firm market capitalization

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Stock prices can be highly volatile, making it difficult to assess firm performance, particularly in the short term. Overall macroeconomic factors such as the unemployment rate, economic growth or contraction, and interest and exchange rates all have a direct bearing on stock prices. Stock prices frequently reflect the psychological mood of investors, which can at times be irrational.

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Economic value created

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the difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it.

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How does accounting help asses competitive advantage?

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(1) accurately assess firm performance and (2) compare and benchmark the focal firm's performance to other competitors in the same industry or against the industry average.

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What is strategic management process and what are the first steps in the process?

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- Method to conceive and implement a strategy. - Lays the foundation for sustainable competitive advantage - The first steps are to define a firm's vision, mission, and values.

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Strategic leadership

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Executives' use of power and influence to direct the activities of others when pursuing an organization's goals.

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Vision

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- Company's aspiration - Must be forward looking and inspiring. - Motivates employees to aim for the same target, while leaving room for individual and team contributions. - Helps intrinsically motivate employees. ex. One day, all children in this nation will have the opportunity to attain an excellent education. - Visionary companies outperformed their peers by a wide margin in stock valuation.

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Mission

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What you do, the products you make, and how you plan to compete.

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Vision vs. Mission

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Vision defines what an organization wants to accomplish ultimately, uses "to." Mission describes what an organization does; it defines the means "by".

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How to make vision and mission statements effective?

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Strategic commitments. Actions that are costly, long-term-oriented, and difficult to reverse.

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Types of vision statements

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Product oriented: defines a business in terms of a good or service provided. ex. to be the safest railroad. Customer oriented: A customer-oriented vision defines a business in terms of providing solutions to customer needs. For example, "We are in the business of providing solutions to professional communication needs."

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A positive relationship between vision statements and firm performance is more likely to exist under what circumstances?

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- Visions are customer-oriented - Internal stakeholders are invested in defining and revising the vision - Organizational structures such as compensation systems are aligned with the firm's vision statement

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Values

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Ethical standards and norms that govern the behavior of individuals within a firm or organization.

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Functions of ethical values?

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- Form solid foundation for vision and mission. - Serve as the guardrails to keep company on track.

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Effective organizational values need what?

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Commitment and involvement from top managers.

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Industry

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A group of companies that face the same buyers and suppliers.

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What does the Five Forces Model Provide

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- THE STRONGER THE FIVE FORCES, THE LOWER THE INDUSTRY PROFIT POTENTIAL - Understand the profit potential of different industries and how they can position their respective firms to gain and sustain competitive advantage. - competition is not only direct rivals but also buyers, suppliers, potential new entry of other firms, and the threat of substitutes. - Profit potential is a function of the five forces that shape competition.

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Five Forces Model

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Threat of entry Power of suppliers Power of buyers Threat of substitutes Rivalry among existing competitors

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Threat of Entry entry barriers?

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Economies of scale Network effects Customer switching costs Capital requirements Government policy Threat of retaliation

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Economies of scale

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Cost advantages that accrue for firms with larger output because they can spread fixed costs over more units, can employ technology more efficiently, can benefit from a more specialized division of labor, and can demand better terms from their suppliers.

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Network effects

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Network effects describe the positive effect that one user of a product or service has on the value of that product or service for other users.

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Customer switching costs

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Switching costs are incurred by moving from one supplier to another.

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Supplier bargaining power is high when?

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Suppliers don't depend on industry. High switching costs when changing suppliers. Differentiated products. No available substitutes.

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Buyer power is high when?

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There are a few buyers. Undifferentiated. Buyers face low or no switching costs.

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Threat of substitute is high when?

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The substitute offers an attractive price-performance trade-off. The buyer's cost of switching to the substitute is low.

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Rivalry is high when?

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Competitive industry structure Industry growth Strategic commitments Exit barriers

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Competitive industry structures

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(1) perfect competition ex. online retailers (2) monopolistic competition most common one ex. apple, samsung, blackberry (3) oligopoly ex. coke and pepsi, or comcast and verizon (4) monopoly ex. many power companies

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Complements

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- Adds value to the original product offering when the two are used in tandem - Complements increase demand for the primary product. - A company is a complementor to your company if customers value your product or service offering more when they are able to combine it with the other company's product or service. ex. Google and Samsung

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Core Competencies

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- unique strengths - allow a firm to differentiate its products and services - competitive advantage can be driven by core competencies -Built with resources and capabilities. Resources: assets Capabilities: skills

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Resource Based View

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Identifies core competencies

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Types of Resources

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Tangible: ex. labor Intangible: ex. culture - Competitive advantage is more likely to spring from intanglible

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What two assumptions does the resouce based view make?

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1. resource heterogeneity—is that bundles of resources, capabilities, and competencies differ across firms. 2. resource immobility: resources don't move easily from firm to firm

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VRIO Framework

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For a resource to be the basis of a competitive advantage, it must be: - valuable (V): factor that raises perceived value. ex. Amazon's inventory management system - rare (R): one or a few firms have it . ex. knowledge of how to make mass customized cars - costly to imitate (I): other companies can not imitate resource at reasonable price. bad ex. Crocs shoes. too easy to imitate. - and the firm must organize (O): ability to capture the resource's value-creating potential ex. xerox couldn't

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How do you sustain competitive advantage?

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(1) better expectations of future resource value: ex. buying a stock cheap and having it rise later (2) path dependence: past choices affect future options (3) causal ambiguity: cause and effect aren't readily apparant. Why did this happen? who knows. (4) social complexity: ex. organizational culture These barriers to imitation are important examples of isolating mechanisms because they prevent rivals from competing away the advantage a firm may enjoy.

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Problem with 5 forces model?

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- point-in-time snapshot of a moving target - managers must repeat their analysis over time in order to create a more accurate picture of their industry

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How to apply five forces model?

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- Define the industry. - Identify key players in each force - Identify drivers of each force - Assess industry structure

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Industry convergence

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a process whereby formerly unrelated industries begin to satisfy the same customer need. ex. tv, movies, radio, and music. Occurs with technological advances.

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scope of competition

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whether to pursue a specific, narrow part of the market or go after the broader market.

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focused cost-leadership strategy and focused differentiation strategy

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competitive scope is narrower

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Types of strategic groups?

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Differentiated vs. Low cost

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Insights from strategic group mapping?

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- Competitive rivalry is strongest between firms that are within the same strategic group - The external environment affects strategic groups differently. - The external environment affects strategic groups differently. -Some strategic groups are more profitable than others

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Value Chain

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Activities from input to output. Competitive advantage flows through activities.

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Components of Value Chain

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- Primary activities: add value directly ex. supply chain management, operations, distribution, marketing and sales, and after-sales service. - Support activities: add value indirectly. ex. research and development (R;D), information systems, human resources, accounting and finance. - Firm infrastructure: processes, policies, and procedures—support each of the primary activities.

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SWOT Analysis

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- Strengths-Opportunities quadrant: offensive, exploit an external opportunity. -Weaknesses-Threats quadrant: defensive, mitigate an external threat. -Strengths-Threats quadrant: to use an internal strength to minimize the effect of an external threat. -Weaknesses-Opportunities: to shore up an internal weakness to improve its ability to take advantage of an external opportunity.

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Problem with SWOT Analysis

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A strength can also be a weakness, and that an opportunity can also simultaneously be a threat. To make the SWOT analysis an effective management tool, the strategist must first conduct a thorough external and internal analysis

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Value Drivers

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Product features Customer service Complements

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Cost Drivers

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Cost of input factors: Economies of scale Learning-curve effects Experience-curve effects

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Business Models

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Razor-Razor-Blade: initial good sold at lost to drive demand for complementary goods Subscription-Based Pay-as-You-Go: pay for what you consume Freemium: basic is free, but have to pay for upgrades. ex. mgraw connect. ebook is the upgrade :(

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Stakeholder strategy

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How external (customers) and internal (employees) stakeholders interact to create and trade value.

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What are the benefits of effective stakeholder management?

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- Stakeholders are more cooperative --> reveal useful information to lower costs/increase value - Increase trust= decrease firm transaction costs. - Increase organizational adaptability/flexibility - Probability of negative outcomes reduced --> predictable and stable returns. - Stronger reputation, managers care about being liked

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What are the steps of stakeholder impact analysis? What must managers pay attention to in the analysis?

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- Identify stakeholders, stakeholder interests, opportunities and threats, social responsibilities, and stakeholder concerns - Power, legitimacy, and urgency

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AFI Strategy Framework, define and explain uses.

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- Analyze (External and internal analysis), Formulate (Business strategy and corporate strategy), and Implement (organizational design and business ethics) - Used to (1) explain and predict differences in firm performance, and (2) to help managers formulate and implement a strategy that results in superior performance.

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What is Strategic Leadership and what are the habits of effective strategic leaders?

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- Behaviors and styles of executives that influence others to achieve the organization's vision and mission. - 67 percent of their time in meetings - Prefer oral communication, spend most of their time in face-to-face meetings. - Consider face-to-face meetings most effective in getting their message across and obtaining the information they need. - Emotionally intelligent with their ability to pick up on rich nonverbal cues.

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Upper Echelons Theory of Strategic Leadership

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- Executives use unique perspectives, shaped by personal circumstances, values, and experiences. - Leadership reflective of age, education, and career experiences, filtered through personal interpretations of the situations they face. - Strong leadership is innate + learning.

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Level 5 Leadership Pyramid

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- Great companies are led by level 5 leaders. - Level-5 manager: builds enduring greatness into the organizations he or she leads. The greatness of a strategic leader can truly be judged only if the organizations are able to sustain a competitive advantage in the years after the successful executive has departed from the organization.

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Strategy Formulation

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- Strategy is chosen by where and how to compete. - 3 Areas: Corporate, Business, and Functional

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Explain Corporate, Business, and Functional Strategy

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- Corporate strategy: Where to compete (industry, markets, and geography). - Business strategy: How to compete (cost leadership, differentiation, or integration). - Functional strategy: How to implement business strategy.

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Where does business strategy occur?

answer

In the SBUs : Standalone divisions of a larger conglomerate. ex. Accounting, Finance, HR

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What are the 3 approaches managers rely on for strategizing competitive advantage?

answer

(1) strategic planning (2) scenario planning (3) strategy as planned emergence.

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Top-down strategic planning

answer

- Rational, top-down process executives use to program future success. - Assumes that we can predict the future from the past. - Works well in non changing environments. - Problem: We cannot know the future. - Companies are now using a more flexible approach in their strategic management process.

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Scenario Planning

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- Managers brainstorm different scenarios to predict possible future events. - addresses both optimistic and pessimistic futures. - formulated strategies they could activate and implement should the envisioned optimistic or pessimistic scenarios begin to appear. - Important not to overlook Black Swan events

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AFI framework in Scenario Planning

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Analysis: managers brainstorm to identify possible future scenarios. Formulation: management teams develop different strategic plans to address possible future scenarios. Implementation: managers execute the dominant strategic plan, the option that top managers decide most closely matches the current reality. If the situation changes, managers can quickly retrieve and implement any of the alternate plans developed in the formulation stage.

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Critisism of strategic planning and alternative?

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- Critisisms: Strategic planning is not the same as strategic thinking.Too confining. Illusion of control. Should be based on an inspiring vision. Synthesize all available input from different internal and external sources into an overall strategic vision. - Bottom-up Strategy (Emergent Strategy): made up of Autonomous actions by lower-level employees, Serendipity (random events), and the resource allocation process

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Bottom up strategic planning components?

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- Intended strategy: outcome of a rational and structured, top-down strategic plan. - Realized strategy: combination of its top-down strategic intentions and bottom-up emergent strategy. - Emergent strategy: Unplanned strategic initiative undertaken by mid-level employees of their own volition. If successful, emergent strategies have the potential to influence and shape a firm's strategy. - Unrealized Strategy: Unpredictable events

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Planned emergence

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Company is built to encourage bottom up action. Ex. google allowing employees to spend time on other projects.

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What makes for an effective strategy?

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Depends on rate of change. Slow=top down, fast=bottom up

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What does the PESTEL model do for a firm?

answer

Way to scan, monitor, and evaluate the important external factors and trends that might impinge upon a firm.

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Political/Legal Factors

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- Can have a direct bearing on a firm's performance. - Governments often combine political and legal factors to achieve desired changes in consumer behavior. - Firms can influence these through lobbying, litigations, etc.

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Economic Factors

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Growth rates Interest rates Levels of employment Price stability (inflation and deflation) Currency exchange rates - Managers need to fully appreciate the power of these factors in order to assess their effects on firm performance.

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Sociocultural Factors

answer

- Capture a society's cultures, norms, and values. This includes demographic trends.

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Technological Factors

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- capture the application of knowledge to create new processes and products.

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Ecological Factors

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Ecological factors concern broad environmental issues such as the natural environment, global warming, and sustainable economic growth.

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Dynamic capabilities

answer

a firm's ability to create, deploy, modify, reconfigure, upgrade, or leverage its resources over time in its quest for competitive advantage.

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Components of dynamic capabilities perspective

answer

Resource stocks: intangible resources Resource flows: investments ... needed to maintain firm performance

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Dynamic capabilities perspective

answer

competitive advantage = outflow of firm's capacity to modify resource to gain competitive advantage in a constantly changing environment.

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What makes for an effective integration strategy?

answer

(V-C) difference between value creation (V) and cost (C), and on the resulting magnitude of economic value created.

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